This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog attempts to explain Why Banco Filipino Failed. But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future.
Editor's Note: This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog post and other blog posts like it attempt to describe why the bank failed.But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.
The Texas Ratio is a measure of a
bank's credit problems. The higher the Texas ratio, the more severe
the bank's credit troubles. The Texas Ratio was developed by Gerald
Cassidy and other analysts at RBC Capital Markets as an early warning
system to identify potential problem banks. According to
Investopedia.com, it was originally applied to banks in Texas in the
1980s. Mr. Cassidy noticed that when problem assets grew to more than
100% of capital, most of the Texas banks in that precarious position
ended up going under. A similar pattern occurred in the New England
banking sector during the recession of the early 1990s.
The Texas Ratio is calculated by
dividing the bank's distressed assets (Non-performing Loans +
Acquired Real Estate, plus Deferred Charges such as unbooked losses)
by the sum of its tangible common equity capital and allowances for
impairment and credit losses.
Tangible common equity is the subset of
shareholders' equity that strips out preferred shares or other forms
of hybrid equity capital as well as goodwill or other intangible
assets. It measures a company's financial strength because it
indicates how much equity the common stockholders would have left in
the event of a company's liquidation. A bank's tangible common equity
plus its allowances for impairment and credit losses indicates the
size of the bank's capital cushion, or its ability to absorb losses.
Banks tended to fail when their Texas Ratio reached 1:1; or 100% of
the bank's capital cushion.
The following table indicates the Texas
Ratio for selected Philippine banks using the figures indicated in
their audited financial statements as of December 31, 2010. The
exceptions to this are Asiatrust Development Bank, whose last
published audited financial statement was as of June 30, 2009, and
Bank of Commerce, Land Bank of the Philippines, and Philippine
Veterans Bank, whose last published audited financial statements were
as of December 31, 2009.
Bank
Texas
Ratio
Philippine Bank of Communications
14.99
Export and Industry Bank
8.84
United Coconut Planters Bank
5.53
Planters Development Bank
2.98
Asiatrust Development Bank
2.51
Bank of Commerce
1.13
Rizal Commercial Banking Corporation
1.09
Philippine Veterans Bank
1.01
Philippine National Bank
0.70
Union Bank of the Philippines
0.70
Security Bank Corporation
0.69
Allied Banking Corporation
0.65
Asia United Bank
0.63
Rural Bank of Makati
0.58
Metropolitan Bank and Trust Company
0.54
BDO Unibank, Inc.
0.44
Development Bank of the Philippines
0.39
Bank of the Philippine Islands
0.36
Land Bank of the Philippines
0.34
Philippine Trust Company
0.34
Philippine Savings Bank
0.23
China Banking Corporation
0.20
Citystate Savings Bank
0.09
As indicated in the table above, eight
banks have a Texas Ratio greater than 1:1. Of these, five banks have
Texas Ratios greater than 2:1. The top three banks on the above list
have Texas Ratios greater than 5:1, which indicates extremely severe
credit problems at these banks.
Recent Developments
Bank of Commerce:
In May 2009, San Miguel Corporation's
property arm and retirement fund have acquired a 51% stake in Bank of
Commerce with an additional equity infusion of PHP 2 billion. As of
December 31, 2010, Bank of Commerce's Capital Funds was increased to
PHP 12.5 billion from PHP 6.7 billion in year-end 2009.
Export and Industry Bank (EIB):
On July 30, 2010, the board of Export
and Industry Bank (EIB)approved the sale of all EIB's bank assets to
Banco De Oro Unibank, Inc. As of April 13, 2011, PDIC gave its
approval for the transaction.
Philippine Bank of Communications:
On July 27, 2011, the group of Roberto
Ongpin acquired a 97.28% stake in Philippine Bank of Communications
from the Chung, Luy, and Nubla families for PHP 4.68 billion.
Disclaimer:
This list only serves as a screening
guide. It is not a definitive guide and must be taken in the context
of other factors. Readers are suggested to make their own
investigations and verify the figures presented. Both BSP and PDIC
have their own problem bank screening systems that are much more
sophisticated in scope and design, given that they have more access
to information over the banks they regulate.
Editor's Note: This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog post and other blog posts like it attempt to describe why the bank failed.But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.
Background
Last Friday, September 9, 2011, the
Monetary Board ordered the Araneta -controlled LBC Development Bank
(LBC Bank) to be closed and placed under receivership of the
Philippine Deposit Insurance Corporation. According to the BSP, LBC
Bank was insolvent, it had unsustainable operations that were
detrimental to depositors and creditors, and it violated a cease and
desist order on unsafe and unsound practices. Around 320,000
depositors were affected, some of whom were the relatives of OFWs who
were in the process of receiving much-needed remittances from their
loved ones abroad. This happened in less than six months after Banco
Filipino's spectacular failure in March 2011.
The Philippine Deposit Insurance
Corporation (PDIC) advised consumers to wisely choose the banks where
they will deposit their money. The trouble is, most depositors don't
and can't read financial statements before they open a bank account.
The regulators, whose job is to safeguard the public's money, have a
problem bank list that they do not divulge to the public, for fear of
sparking another bank run. So who can the public turn to, to advise
them where to put their money? No one, except the banks themselves
who will always promote their self-interests. This analysis is an
attempt to fill in that knowledge gap, by screening out the weaker
banks that seem ready to implode at any given moment.
LBC Development Bank
LBC Bank bears many similarities to
Banco Filipino. Initial media reports indicated that LBC Bank
offered relatively high interest rates to depositors.
LBC's audited financial statements are
unavailable. They are not on the BSP website and LBC Bank's own
website http://www.lbcbank.com.ph
has been taken down
A quick perusal of its December 2010
published statement of condition on the BSP website indicates that,
like Banco Filipino, it had a very high proportion of illiquid assets
(http://www.bsp.gov.ph/banking/psoc_tb/LBC%20DB.htm).
Over 50 percent of its asset base consisted of assets that are not
relevant to banking operations, namely, acquired real estate (PHP
167.39 million), and a whopping PHP 3.2 billion in other assets. The
“other assets” bucket can be comprised of many things such as
goodwill, deferred tax assets, or even unbooked losses. In other
words, around PHP 3.3 billion of LBC's PHP 6.4 billion in assets was
in non-earning assets.
You could argue that acquired real
estate can be sold and, if acquired some time ago, can be sold at a
profit. But selling real estate is not the bank's business, making
money on loans is. The high proportion on non-earning assets on LBC
Bank's books show that LBC Bank's ability to make money through loans
was severely hampered. Another problem associated with holding such
assets is liquidity. If the bank has liquidity problems, it will be
often forced to sell assets and quickly. A quick sale of real estate
often means a big discount, and if the real estate is sold below book
value, the bank will incur a loss and the loss will eat into the
bank's capital. Other assets such as goodwill, which often reflects
the premium a company pays to buy the equity of another company, can
be impaired if the acquired company's economic prospects are
diminished. Deferred tax assets, which appear on a company's books
due to losses in previous years, may have to be written down if it
becomes clear that the company will not make enough future taxable
profit to utilize the tax loss. Other assets, just as in Banco
Filipino's case, can also consist of unbooked losses. If this is the
case, then the value of those assets is plainly zero.
Moreover, LBC Bank's non-earning assets
of PHP 3.3 billion is roughly six times the bank's equity of PHP 550
million. A 10 percent drop in the value of those non-earning assets
will reduce the value of the bank's equity by 60%. A 20 percent drop
in the value of its non-earning assets will more than wipe out the
value of the bank's equity.
In 2009, LBC Bank was already in
roughly the same financial condition. In 2009, LBC Bank already had
a high proportion of its asset base in non-earning assets - PHP 2.5
billion in non-earning assets out of a total asset base of PHP 5.5
billion and these non-earning assets were already almost five times
its equity base of PHP 539 million.
Given this scenario, LBC Bank had
already been a zombie bank, neither living nor dead. Its large
non-earning assets severely limited its ability to make loans and
money. But through the use of relatively high interest rates, it was
able to attract enough deposits (deposit growth of PHP 961 million in
2010) to keep alive for another year.
Other Potential Problem Banks
The question is are there other banks
like LBC Bank and Banco Filipino out there? Are there other banks
that exhibit the same characteristics of a high proportion of
non-earning assets as a percentage of assets and equity? A quick
flip through the published statements of condition on the BSP website
answers the question: a most definite yes.
List of Local Philippine Banks
with a High % of
Non-Earning Assets to Total Assets
As of December 2010
Bank
Total Assets
(In PHP Millions)
Non-Earning Assets
(In PHP Millions)*
Total Stockholders' Equity
(In PHP Millions)
Non-Earning Assets/ Total Assets
(In %)**
Bank of Calape
12
9
6
75%
LBC Development Bank
6,391
3,323
548
52%
Export and Industry Bank***
31,003
15,225
1,410
49%
Inter-Asia Development Bank
88
32
3
36%
The Palawan Bank
287
93
10
32%
Pridestar Development Bank
123
34
66
27%
GSIS Family Bank
3,575
833
690
23%
Sampaguita SLA, Inc.
118
27
60
23%
Philippine Bank of Communications****
43,802
10,080
4,777
23%
Opportunity Microfinance Bank
484
98
119
20%
* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets
**Arbitrary % Cut Off was set at 20% of
Total Assets
*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010
**** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011
.
List of Local Philippine Banks
with a High % of
Non-Earning Assets to Total Stockholders Equity
As of December 2010
Bank
Total Assets
(In PHP Millions)
Non-Earning Assets
(In PHP Millions)*
Total Stockholders' Equity
(In PHP Millions)
Non-Earning Assets/ Total Stockholders' Equity
(In %)**
Legaspi Savings Bank
1,912
335
26
1291%
Export and Industry Bank***
31,003
15,225
1,410
1080%
Inter-Asia Development Bank
88
32
3
1066%
The Palawan Bank
287
93
10
914%
LBC Development Bank
6,391
3,323
548
606%
Philippine Bank of Communications****
43,802
10,080
4,777
211%
United Coconut Planters Bank
179,470
28,684
14,244
201%
Planters Development Bank
50,755
6,702
3,706
181%
Bank of Calape
12
9
6
160%
Hiyas Savings and Loan Bank
1,237
204
141
144%
Equicom SB
3,998
486
399
122%
GSIS Family Bank
3,575
833
690
121%
Philippine National Bank
299,787
32,290
30,773
105%
* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets
**Arbitrary % Cut off was set at 100% of Total Stockholders' Equity
*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010
**** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011
List of Local Philippine Banks
with both High Non-Earning Assets as a % of
Total Assets and Total Stockholders Equity
As of December 2010
Bank
Total Assets
(In PHP Millions)
Non-Earning Assets
(In PHP Millions)*
Total Stockholders' Equity
(In PHP Millions)
Philippine Bank of Communications**
43,802
10,080
4,777
Export and Industry Bank***
31,003
15,225
1,410
Bank of Calape
12
9
6
LBC Development Bank
6,391
3,323
548
GSIS Family Bank
3,575
833
690
The Palawan Bank
287
93
10
Inter-Asia Development Bank
88
32
3
* Non-Earning Assets include Real and Other Properties Acquired (ROPA), Non-Current Assets Held for Sale, and Other Assets
** The group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communcations last July 27, 2011
*** The board of Export and Industry Bank approved the sale of all its bank assets to Banco De Oro Unibank, Inc. last July 30, 2010
Disclaimer:
This list only serves as a screening guide. It is not a definitive guide and must be taken in the context of other factors. The figures are based on the individual banks' statement of condition as of December 31, 2010 as published in the BSP website (www.bsp.gov.ph). For this analysis, no attempt was made to go through the audited financial statements of each bank. Readers are suggested to make their own investigations and verify the figures presented. Both BSP and PDIC have their own problem bank screening systems that are much more sophisticated in scope and design, given that they have more access to information over the banks they regulate.
Editor's Note: This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog post and other blog posts like it attempt to describe why the bank failed.But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.
This presentation attempts to explain
the following points:
How Banco Filipino's attempt to
book PHP 12.1 billion in losses as assets is actually a practice prevalent
throughout the banking industry.
How the BSP/MB allowed the
deferment and amortization of unbooked losses arising from: a) SPV Transactions; b) Acquisitions of failed/failing banks, and c) Large credit losses
Why the BSP/MB action allows some
banks to operate as ponzi schemes, with little or no capital cushion
to back up the inevitable loan losses that may come from an economic
downturn.
In the Congressional Hearings on Banco
Filipino's closure last May 17, 2011, Congressman Giorgidi B.
Aggabao, who is a CPA, expressed surprise at how Banco Filipino
attempted to book PHP 12.1 billion in losses as assets. BSP Deputy
Governor Nestor Espenilla characterized Banco Filipino's capitalized
losses as “ampaw” or “puffed up” assets. He said that
such “ampaw” assets are matched by “ampaw”
capital. He also said that the capitalization of losses does not
conform to Generally Accepted Accounting Principles, or better known
as GAAP. He explained that “there is no jurisdiction that would
consider “ampaw' assets to be real assets. The value of
such assets is zero.”
However, in the same Congressional
Hearing, Congressman Luis R. Villafuerte says that Banco Filipino was
really imitating what BSP has allowed many other banks to do, which
is to:
Defer the booking of realized
losses, and
Amortize realized losses over a
period of 10 to 20 years.
Congressman Villafuerte is in a
position to know because his wife, Nelly Favis Villafuerte, sits in
the Monetary Board.
Congresman Villafuerte is correct. The
BSP/MB has allowed many other banks to: 1) defer the booking of
realized losses; and 2) amortize the realized losses over 10 years to
20 years. The BSP/MB has allowed this for losses arising from:
The Sale of Non-Performing Loans
to Special Purpose Vehicles (SPVs)
The Acquisition by a Bank of
another weaker Bank with substantial Non-Performing Assets
Large Credit and Impairment Losses
on financial assets of banks that are undergoing a BSP-approved
Rehabilitation Plan
SPV Transactions
On December 23,
2002, the Philippine Congress passed R.A. 9182, otherwise known as
the “Special Purpose Vehicle Act of 2002”. The Act provided a
framework for the creation and regulation of Special Purpose Vehicles
(“SPVs”) that acquire and invest in the Non-Performing Assets
(“NPAs”) of Financial Institutions. It granted fiscal and tax
incentives and exemption privileges for transactions involving the
transfer of NPAs to an SPV and from an SPV to a third party. The law
was designed to address the burgeoning non-performing asset problems
plaguing the Philippine banking sector by:
Encouraging
private sector investment in NPAs;
Improving
the Liquidity of the financial system as a whole
However, SPV transactions had a very significant problem. Both SPV
Investors and Banks faced a classis pricing conundrum. The SPV
investors wanted to buy NPAs from the banks at a price low enough for
the SPV Investors to make a decent profit that will compensate them
for the risks they undertook. Banks wanted to sell their NPAs at a
price high enough to minimize losses that will impact their equity
capital. Often, the two parties to the transaction could not agree
on price.
So
BSP rode to the rescue of the banks. On September 26, 2003, the BSP
issued a Memorandum regarding the Monetary Board Resolutions No. 917
(dated June 26, 2003) and No. 1199 (dated August 21, 2003) approving
certain accounting guidelines on the sale of non-performing assets
(NPAs) to Special Purpose Vehicles. The guidelines provided
temporary regulatory relief, in addition to tax relief under the SPV
Law, particularly in the timing of the recognition of losses so that
banks may be encouraged to maximize the sale of their NPAs, even at
substantial discounts. The banks would be able to avail of this
“regulatory relief” provided that the banks shall fully disclose
the impact of this relief in all relevant financial reports, in the
interest of upholding full transparency and sustaining market
discipline.
BSP
allowed banks to book the losses they realize on the sale of their
NPAs to SPVs as deferred charges that may be written down over seven
years. On February 5, 2004, the amortization period for deferred
charges was extended from seven years to ten years, according to the
following schedule.
End of Period from Transaction Date
Cumulative Write-down of Deferred Charges
Year 1
5.00%
Year 2
10.00%
Year 3
15.00%
Year 4
25.00%
Year 5
35.00%
Year 6
45.00%
Year 7
55.00%
Year 8
70.00%
Year 9
85.00%
Year 10
100.00%
Rehabilitation Plans
BSP
also allowed banks to book losses as deferred charges as part of a
BSP-Approved Rehabilitation Plan for:
a bank that acquired a
weaker bank with substantial NPAs; and
a bank that incurred
substantial credit losses.
PFRS/PAS Compliance
As BSP Deputy
Governor Nestor Espenilla said, the booking of losses as deferred
charges does not conform to generally accepted accounting principles,
or GAAP. The booking of deferred charges does not conform to the
provisions of Philippine Financial Reporting Standards (PFRS) or
Philippine Accounting Standards (PAS) in the preparation of audited
financial statements. Banks will still be required to comply with
PFRS/PAS for the purpose of preparing audited financial statements.
Banks that do not comply with PFRS/PAS will show a qualified
auditor's opinion that:
States that the bank's booking of
deferred charges does not comply with the provisions of
GAAP/PFRS/PAS.
Discloses the impact such
compliance would have on the bank's financial statements had the
losses been recognized.
In 2005, BSP Governor Amando M.
Tetangco, Jr. warned that: “availing of the regulatory incentives
involves a trade-off in the sense that audited financial statements
may warrant a qualified opinion from external auditors.” Banks
“with strong balance sheets may very well opt not to defer the
booking of losses to avoid a qualified auditor's opinion.”
Findings
As of 2009 and 2010, the audited
financial statements of at least ten Philippine banks show a
qualified auditor's opinion. These banks:
range from small to large in asset
size;
have a total of PHP 70.1 billion
in deferred charges
have unbooked losses that will
result in a reduction of total bank capital funds ranging from as
low as 11.48% to as high as 721.43%. For some banks, a recognition
of unbooked losses may completely wipe out the bank's shareholder
capital.
Asset Size
The ten banks with
a qualified auditor's opinion range in asset size from:
Small: PHP 11.6 billion in Assets
(Asiatrust Development Bank)
Large: PHP 515.6 billion in Assets
(Land Bank of the Philippines)
These ten banks have a combined asset base of PHP 1,612.5 billion.
Capital Funds
The ten banks with a qualified auditor's opinion range in capital funds size from:
Small: PHP 1.4 billion in Capital Funds (Export and Industry Bank)
Large: PHP 53.1.3 billion in Capital Funds (Land Bank of the Philippines)
These ten banks have a combined capital funds base of PHP 156.0 billion.
Deferred Charges
The deferred charges discussed here refer to the unbooked losses quantified and disclosed by the bank's external auditor. Recognition of these deferred charges as actual losses will reduce bank assets and capital by a corresponding amount.
The ten banks with a qualified auditor's opinion have deferred charges that range in size from:
Small: PHP 1.1 billion in Deferred Charges (Philippine Veterans Bank)
The ten banks with a qualified auditor's opinion have a combined deferred charges base of PHP 70.1 billion.
Amortization Period for Deferred Charges
The amortization period for deferred charges range from:
Minimum: 10 years (Asiatrust Development Bank, Bank of Commerce, Export and Industry Bank, Land Bank of the Philippines, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, Planters Development Bank, Rizal Commercial Banking Corporation, United Coconut Planters Bank)
Middle Range: 12 years to 15 years (Planters Development Bank, Export and Industry Bank)
Maximum: 20 years (Philippine Veterans Bank)
Impact on Each Bank's Capital Funds
Had the unbooked losses or deferred charges been booked or recognized, the capital funds of these banks would be greatly reduced. The impact on capital funds would range from:
Low: 11.5% reduction in Capital Funds (Land Bank of the Philippines)
High: 721.4% reduction in Capital Funds (Export and Industry Bank)
Some will have at least a 50% reduction in capital funds (Bank of Commerce).
Quite a few will experience a complete wipe-out of capital funds:
Asiatrust Development Bank (100%)
Philippine Bank of Communications (163.9%)
United Coconut Planters Bank (190.5%)
Export and Industry Bank (721.4%)
Overall Impact on the Philippine Banking System
The unbooked losses or deferred charges represent a significant chunk of the Total Capital Funds of the Universal and Commercial Banking System as of December 2010. The total deferred charges amount to PHP 70.1 billion out of the PHP 711.5 billion in Total Capital Funds of the Universal and Commercial Banking System.
In other words, around 10% of the Total Capital Funds of the largest Philippine banks has to be written down to zero.
Overstated Profits and Capital Funds
As early as June 19, 2006, Moody's Investor Services said that the earnings and capital of Philippine banks were overstated due to: “lax regulations on losses booked from the sale of assets using the Special PurposeVehicle framework.”
As BSP Deputy Governor Nestor Espenilla explained, “ampaw” assets equals “ampaw” capital.. Their real value is zero. This means that, for some of these banks, there is very little to no capital to cushion the bank against further losses. A deterioration in the economy, credit conditions, or liquidity, could cause these banks to suddenly implode - as did Banco Filipino last March 17, 2011.
Veneer of Health
The overstatement makes weak banks look healthier than they really are. Weak banks that should be recapitalized, merged with stronger banks, or liquidated are kept alive unnecessarily. It allows the creation of a system wide ponzi scheme wherein some banks stay alive through the influx of new depositors. Most losses don't read financial statements before they open an account in a bank. Moreover, the losses are not readily apparent. It will require someone to dig deep into the financial statement to arrive at true picture of a bank's financial condition. As the global financial crisis has shown, even some supposedly sophisticated professional investors don't dig deep into financial statements to find out the true financial condition of a bank or a financial institution.
Moral Hazard
The lax regulatory environment, the abundance of BSP-approved financial rehabilitation plans create a moral hazard. Weak banks, like Banco Filipino, have come to expect the BSP/MB to ride to their rescue and provide regulatory relief, financial assistance.
Essentially, Banco Filipino, in its attempt to book losses as assets, was merely attempting to duplicate the generous financial accommodations that the BSP/MB have allowed for other banks. This attempt was coupled by Banco Filipino's threat of punitive litigation and legal harassment against BSP and its officials. Had Banco Filipino succeeded, it would have allowed Banco Filipino to continue their unsafe, unsound, and fraudulent banking practices.
Moral Hazard should be avoided as much as possible.
Recent Developments
Bank of Commerce:
In May 2009, San Miguel Corporation's property arm and retirement fund have acquired a 51% stake in Bank of Commerce with an additional equity infusion of PHP 2 billion. As of December 31, 2010, Bank of Commerce's Capital Funds was increased to PHP 12.5 billion from PHP 6.7 billion in year-end 2009.
Export and Industry Bank (EIB)
On July 30, 2010, the board of Export and Industry Bank (EIB)approved the sale of all EIB's bank assets to Banco De Oro Unibank, Inc. As of April 13, 2011, PDIC gave its approval for the transaction.
Philippine Bank of Communications
On July 27, 2011, the group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communications from the Chung, Luy, and Nubla families for PHP 4.68 billion
Sources:
Regulations:
Transcript of the Philippine
Congressional Hearings on Banco Filipino, May 17, 2011
Republic Act 9182: Special Purpose
Vehicle Act of 2002
Accounting guidelines on the sale
of non-performing assets (NPAs) to Special Purpose Vehicles (SPVs)
and to qualified individuals for housing under "The Special
Purpose Vehicle (SPV) Act of 2002"
Monetary Board Resolution 135
(2/5/2004)
Revised accounting guidelines on
the sale of non-performing assets (NPAs) to Special Purpose Vehicles
(SPVs) and to qualified individuals for housing under "The
Special Purpose Vehicle (SPV) Act of 2002"
Audited
Financial Statements:
Asiatrust Development Bank (As of
June 30, 2009; Notes 8, 10, and 23)
Bank of Commerce (As of December
31, 2009; Notes 14, 15, and 34)
Export and Industry Bank (As of
December 31, 2010; Notes 2, 12, 17, and 27)
Land Bank of the Philippines (As
of December 31, 2009; Note 12)
Philippine Bank of Communications
(As of December 31, 2010; Notes 15 and 32)
Philippine National Bank (As of
December 31, 2010; Notes 9 and 10)
Philippine Veterans Bank (As of
December 31, 2009; Notes 7 and 28)
Planters Development Bank (As of
December 31, 2010; Notes 32 and 34)
Rizal Commercial Banking
Corporation (As of December 31, 2010; Note 11)
United Coconut Planters Bank (As
of December 31, 2010; Notes 1, 12, 13, and 23)
Press Releases:
BSP: "Press Statement on the
Amendments to the Accounting Guidelines on the Sale of NPAs to SPVs
and Qualified Individuals for Housing" - December 23, 2005
San Miguel Corporation: "SMC
to Strengthen Capital Position of Bank of Commerce" - June 8,
2009
Publications:
Philippine Daily Inquirer:
"Moody's says RP banks'
profits 'overstated'", by Doris Dumlao, June 19, 2006
"Ongpin bloc takes over PBCom
in P4.7B deal; ISM-led consortium assumes 97.28% bank stake",
by Doris C. Dumlao, July 27th, 2011
Bangko Sentral ng Pilipinas
Consolidated Statement of
Condition as of December 31, 2010, Universal and Commercial Banking
System
Website:
Bank of Commerce Website on
Financial Information: http://www.bankcom.com.ph/abtfi.php
Editor's Note: This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog post and other blog posts like it attempt to describe why the bank failed.But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.
This blog post attempts to explain the following points:
Why Banco Filipino Failed
Why it should have been closed much earlier
Why the regulators failed to act in a timely manner
Why the inaction of the regulators led to a costlier failure for all concerned, namely, depositors, investors, and taxpayers
Why this inaction leads to an erosion of trust and confidence in the Philippine Banking System
Why it also fosters an environment wherein a bank owner can steal from his own bank and do so with impunity
For the first seven years since its reopening, from 1994 until 2001, Banco Filipino remained profitable:
Total Banking Income was up. Earnings were positive. It only began to lose money in 2002, when the bank had to be rescued by the BSP.
Loans grew significantly, climbing 26 percent a year. In 1994, Loans stood at PHP 848 million. By 2002, loans amounted to PHP 5.4 billion. Deposits grew even faster, by 31 percent a year. In 1994, the deposit base was PHP 660 million. By 2002, the deposit base was PHP 5.75 billion.
Meanwhile, Acquired Assets grew just as fast, by 23 percent year. In 1994, Acquired Assets stood at PHP 580 million. By 2002, it stood at PHP 3 billion. Acquired Assets jumped by 83 percent in 2001, after the BSP Comptrollership was lifted in 2000. In 2002, it jumped another 45%. By 2002, Acquired Assets made up almost 25% of the bank's total asset base.
Acquired Assets grew so much that Asset Sales outstripped Banking Revenues by 2001. Banco Filipino looked and performed more like a real estate company and less like a bank.
Without Acquired Asset Income, Banco Filipino was actually losing money, starting in 2000. In 2000, Net Income, net of Acquired Asset Income, was a net loss of PHP 431 million. In 2001, the loss tripled to PHP 1.5 billion. In 2002, it lost PHP 1.1 billion.
Banco Filipino's liquidity position was severely reduced by the conversion of liquid earning assets into Acquired Assets. Its Quick Assets to Total Deposits Ratio, which measures the ability to meet deposit withdrawals, declined steeply. In 1994, that ratio stood at a healthy 91.6 percent. By 2001, the ratio was down to only 22.6 percent. In 2002, it was even lower: 12.2 percent. The largest percentage drops in liquidity occured in 2001 - approximately negative 41.6 percent. And in 2002, liquidity dropped another 45.8 percent.
So liquidity was already very poor by the time the BSP extended a 180-day special liquidity facility to Banco Filipino on December 2, 2002. Of the PHP 3.5 billion package, PHP 1.34 billion was availed of in 2002. By June 19, 2003, Banco Filipino met most definitions of insolvency: 81 percent of its total loan portfolio was non-performing, 67 percent of its total loan portfolio was classified as DOSRI or insider loans. The DOSRI loans were concentrated among just 17 borrowers.
Banco Filipino's troubles in 2002 were not caused by poor management, or by a liquidity crisis, or by a smear campaign. It was caused by fraud.
In 2002 and 2003, minority shareholder Ana Maria Aguirre Koruga, asked the BSP to investigate the bank. She claimed that Banco Filipino's management and directors had: One, engaged in unsafe, unsound, and even fraudulent banking practices. Two, engaged in self-dealing. Three, violated banking laws prohibiting or limiting DOSRI transactions, put the bank and its depositors in jeopardy. The minority shareholder sued not just Banco Filipino's board and management, but also, sued both the BSP and the Monetary Board to replace current board and management and place the bank under receivership.
The complaint documented around PHP 1.95 billion in loans to six dummy borrower corporations made from 2000 to 2002.
These six dummy corporations all operated on a similar modus operandi: Lend favorably to Dummy Corporations affiliated with Banco Filipino Vice-Chairman Bobby Aguirre. These dummy corporations did not have the financial capacity to justify the loans at the time of loan approval. The dummy corporations would then provide Banco Filipino with collateral properties from other corporations affiliated with Banco Filipino Vice Chairman Bobby Aguirre. The bank would then appraise the collateral properties at inflated valuations. The dummy corporations would not pay any interest or principal on the loans. Instead, they would settle their loan obligations via Dacion en Pago within months of loan approval.
This modus operandi became the preferred method for drawing large amounts of cash out of Banco Filipino for the benefit of BF Vice Chairman Bobby Aguirre. It was a way of disposing or selling unsaleable real estate to Banco Filipino. It allowed Banco Filipino to continue to reflect a profit and deflect regulatory scrutiny.
The Dacions made by the Dummy Corporations explain the jump in Acquired Assets from 2000 to 2002
The six dummy corporations had no financial capacity to justify the loans at the time of loan approval.
On the balance sheet side, The size of their assets were small relative to the size of the loan. Paid-up capital was also small relative to the size of the loan. For instance, one dummy corporation had assets and paid-up capital of less than PHP 1.0 million in the year before it received a PHP 350 million loan from Banco Filipino.
On the income statement side, net sales was minimal. Net Income was often negligible or even negative. Dummy Corporation BF Home Depot had no revenues and had lost PHP 1.0 million the year before it received a loan of PHP 359 million from Banco Filipino.
The dummy corporations had a common cast of interlocking directors and officers.
This common cast of characters all have business and personal links to BF Vice-Chairman Albert C. Aguirre.
Dummy Corporations all had interlocking ownerships. In other words, they own or are owned by other dummy corporations that have borrowed, defaulted, and settled their loan obligations via dacion en pago. For instance, Taurus Land, which borrowed PHP 270 million, owned 81 percent of Glamor World, which also borrowed PHP 270 million. Glamor World, in turns owns 74 percent of its parent, Taurus Land.
The Dummy Corporations all had common corporate addresses. Filipino Vastland listed its corporate address as 1015 Executive Center, Tropical Avenue, Las Pinas City - the personal residence of Banco Filipino Vice Chairman Bobby Aguirre.
The loan proceeds were not applied to the borrower's stated purposes. For instance, BF Home Depot, which was approved for a PHP 359 million loan on March 24, 2000 for the purpose of financing inventory to stock a retail establishment selling home furnishings and fixtures. BF Home Depot never paid any interest or principal on the loans but settled its loans via Dacion en Pago on July 24, 2001. The site of its proposed retail establishment has remained a chicken coop years after loan disbursement.
Collateral was provided by corporations related to Albert C. Aguirre.
Collateral values were often grossly over inflated at the time of loan approval.
The loans were often settled via dacion within months of the loan release. In the case of Glamor World, which borrowed PHP 270 million, the time from loan release to dacion took only 22 days!
Given these dubious transactions, it is not surprising that Banco Filipino needed BSP's help in 2002. It would not be surprising if there were many more such dubious transactions. However, BSP did nothing to address the concerns of the minority shareholders. It reinstalled a Comptroller as a condition of the emergency loans it extended in December 2002.
Meanwhile, Banco Filipino operations continued to deteriorate. Losses accumulated, reaching PHP 12.1 billion from 2003 to 2008. From 2007 to 2010, losses vastly exceeded its capital base of PHP 1.6 billion as of March 2004 every year. It lost PHP 4.2 billion in 2007, PHP 2.4 billion in 2008, PHP 2.6 billion in 2009, and PHP 2.7 billion for the first nine months of 2010.
Banco Filipino's loan portfolio has remained stagnant despite the PHP 9.2 billion growth in deposits. With NPLs at 77 percent, the bank had very little in terms of unencumbered earning assets to generate additional banking revenue and curb losses. BSP characterized this as a ponzi scheme. The bank was kept alive by the infusion of new deposits. The bank grew deposits by offering interest rates as much as 5.75% above market rates.
BSP had many chances to close the bank. The bank could have been closed in 2002, when the bank experienced a run and was rescued by BSP. It could have been closed in 2004, when 86% of the loans were non-performing. It could have been closed in 2007, when losses reached PHP 4.2 billion. Or it could have been closed in the first quarter of 2009, when the bank experienced another liquidity crisis and needed a cumulative total of PHP 4.1 billion in Overnight Clearing Lines from the BSP.
BSP cited the need for complete due process as a rationale for the long closure process of Banco Filipino. It claimed that the standard of extraordinary diligence in banking supervision was a factor for the length of time it took to close Banco Filipino. This due process took almost nine years. This process was so long and slow to the point of negligence. It also enlarged the problem.
Had Banco Filipino been closed earlier, the ultimate cost to uninsured depositors may not have been as big. At the time of closure, the estimated deposit base of Banco Filipino was PHP 15 billion, or PHP 8.5 billion bigger than its deposit base of PHP 6.5 billion in 2004. The estimated uninsured deposit base at the time of closure was PHP 5.6 billion or roughly 86 percent of the 2004 total deposit base. PDIC could have saved a substantial portion of the estimated PHP 9.4 billion it has to pay out to insured depositors from its deposit insurance fund and from public funds.
The regulators were impotent with Banco Filipino. They could not compel the bank, a publicly-listed firm in a highly regulated sector to change management responsible for the bank's precarious financial condition. They could not get Banco Filipino to significantly reduce Executive Compensation running at PHP 600 million a year while the bank was losing over PHP 2.0 billion a year every year. BSP could not persuade Banco Filipino to realize the supposed value of its acquired assets through genuine asset sales that will recapitalize the bank with hard cash, instead of inflated properties. It could not mandate Banco Filipino to reverse the deferment of its PHP 12.1 billion in operating losses despite numerous Monetary Board directives to do so. BSP could not get Banco Filipino to issue audited financial statements since 2002. It did not force Banco Filipino to resume holding formal board meetings that have not taken place since 2002. It could not do this despite the presence of a BSP installed Comptroller as a condition of the rescue package it extended Banco Filipino in 2002.
Banco Filipino faced no repercussions for its actions. It correctly assumed that financial assistance will always be forthcoming. As late as September 2010, despite no visible improvement in the bank's operations, Banco Filipino was able to negotiate a rehabilitation plan with BSP and the Monetary Board that seemed to leave the bank's board and management intact, allow the deferral or capitalization of losses, allow the recapitalization of the bank with real estate properties. The main reason why this plan was not operationalized was only because Banco Filipino refused to drop its PHP 18 billion damage suit against BSP and its officials as BSP's precondition for the adoption of the rehabilitation plan.
The only thing that had changed was that Banco Filipino, at that time, seemed willing to drop its damage claim against the BSP as a precondition of the adoption of the rehabilitation plan. It seems that the regulators overriding concern was the removal of the risk of punitive litigation and legal harassment. That concern overshadowed the safety and soundness of the banking system, the defrauding of minority investors, and the depletion of the deposit insurance funds.
Meanwhile, the minority shareholders were stymied at every turn. Their fraud complaint was characterized by both the media and by the regulators as a family squabble among the members of the Aguirre family. The real issue, however, was massive fraud. The BSP and the Monetary Board blocked numerous efforts of minority shareholders to assess the true financial condition of the bank and bring about a change in bank management and policies.
On June 19, 2009, in the case "Koruga vs. Arcenas", the Supreme Court ruled that all bank fraud cases are the exclusive jurisdiction of the BSP. The minority shareholder had no recourse to the Regional Trial Courts even if the BSP did not act on their complaints. This means that the BSP is the sole venue for resolving disputes among bank shareholders. This ruling applies to all bank fraud cases. It represents a severe diminution of investor protections, particularly for foreign investors who lack the political connections of their local partners. It may dissuade further investment into the Philippine Banking Sector.
Regulators want Congress to amend the degree of diligence required from BSP and its officers in bank supervision duties from extraordinary to reasonable. It also wants better mechanisms for the quick resolution of problem banks. For instance, PDIC supports a Closed Bank Liquidation Act that ties all laws with respect to bank liquidation in one comprehensive act.
The System is Broken. Bank management can commit fraud with relative impunity. Regulators are reluctant to act in a timely manner for fear of years of punitive litigation and legal harassment. Minority Shareholders have no legal recourse to fight bank fraud if the regulators refuse to act.
This will lead to a continued erosion of confidence in the banking system. It fosters a control fraud environment wherein a bank owner or executive uses the bank he controls as a weapon to commit fraud. A determined and criminally minded bank owner can steal from his own bank and get away with it. The fraud will exist and go unreported for years on end. Regulators are unable to stop the fraud. Fraud only stops when the bank collapses.
In the Philippines, the best way to rob a bank might be to own one.
